Views on thefuture direction of the base metals

Tag : base metals
Copper has fallen to a 6 month low in London trading,aluminum is retreating to a 4th weekly loss in a row and zincrecently hit a 2 year low. Weaker demand in industrialized nationsand a surprisingly stronger U.S. Dollar appears to the primaryculprits causing the pullback.
However, emerging markets still seem to be supporting prices andbalancing the demand decline when you look at the growth picture ofthese fledging economies. Coppers open interest has spiked 3.8% inJuly, this normally is a sign of increasing short positions orcommercial hedgers protecting themselves against lower prices.
Will the market for these critical metals continue to weaken or isa new bull run right around the corner?
Regardless of your bias, there are option strategies to bestreflect what you believe is going to happen in the near future. Ibelieve the Invesco Power Shares Base Metal Fund ( DBB | Quote | Chart | News | PowerRating ) is an excellent proxy to trading the futures directly. Itrepresents the movement of an index that is directly tied toaluminum, copper and zinc prices. The performance has beenimpressive over the last 7 years but the party may be coming to anend.
Here are 3 options strategies to best represent your views on thefuture direction of the base metals. Remember we are assuming amonth time horizon and $ 2000.00 of risk capital on the trade.
Bearish
A Put Back Spread makes sense, here are the mechanics:
Buy 20 January 2009 20 Puts DBBMT at $1.35
Sell 10 January 2009 21 Puts DBBMU at $1.75
Your break even point is $18.05 and trade has a total risk of$1950.00
Neutral
A Long Straddle is what a neutral biased trader should consider.Here is a current example of one:
Buy 3 January 2009 23 Calls DBBAW at $2.10
Buy 3 January 2009 23 Puts DBBMW at $3.50
Break even is $17.40 and $28.60. A total risk of $1680.00 and gainsare theoretically unlimited
Bullish
Bullish Call Spreads look sweet here if you